B2B Fintech Investment On The Rise

Long overshadowed by their consumer counterparts, B2B payment firms are seeing greater interest from venture capital, private equity and strategic investors. Their target: financing solutions for both buyers and suppliers, as well as software tools that automate management of accounts receivable and accounts payable.

"[B2B payments] is such a big opportunity, and yet everybody is talking about digital wallets and retail payments," says Matt Harris, managing director at Bain Capital Ventures, who has spent six years as an investor in the segment. "My view is that there are so many more unsolved problems in B2B payments."

A recent report by McKinsey & Co. estimated the size of the global payments industry at $1.8 trillion in 2015, growing to $2.2 trillion by 2020 on strong fundamentals. There are few estimates of the specific B2B market, with some pegging it at about $250 billion currently.

Companies in the sector, technically known as electronic invoice presentment and payment (EIPP) firms, help businesses by reducing paperwork and enabling the fractional cross-border payments, says Jim Hale, retired founding partner of FTV Capital, who made his first investment in EIPP 17 years ago.

Traditionally, these functions have been handled by legacy enterprise resource planning software (ERP) systems. Steve McLaughlin, founder, managing partner and CEO of Silicon Valley-based Financial Technology Partners, says fintech firms are targeting so-called point solutions for specific functions. They also are using cloud technology to serve small and midsized business unable to afford ERP systems, he says.

Notable players in the space are New Jersey-basedBilltrust, which raised $50 million in new capital last week; Israel-foundedPayoneer, which raised $180 million in growth equity from TCV in October; and automated accounts-payable provider AvidXchange, which raised $18 million in November after a $225 million minority investment from Bain Capital Ventures in September 2015.

Other firms include Atlanta, Georgia-based PrimeRevenue, with total funding of $120 million, San Francisco-based Taulia, which has raised $137 million, and Palo Alto, California-based Bill.com, which has raised more than $159 million.

Middle market financial sponsor Lovell Minnick Partners is evaluating targets in B2B payments with a typical investment size of around $20 million, says partner John Cochran, adding that the firm prefers an ownership stake of 30% or more.

Coupa Software, a developer of spend management technology, and Blackline Systems, a cloud-based accounting system, both went public in 2016.

Banks traditionally have dominated business-to-business payments. Jay Wilson, an analyst with Mercer Capital and the author of a recent book on fintech, says they may decide to buy B2B companies rather than try to develop that expertise in house.

“Business commercial customers are some of the most profitable customers for the traditional incumbents,” Wilson says. “It’s not an area where they’re going to cede ground without a fight.”

FT Partner’s McLaughlin, however, notes that banks are hamstrung by regulators and are not likely to acquire B2B payments companies as a result.

“That fact, however, will drive banks to invest in and partner with these companies which will in turn create huge upside for these financial management solutions players,” he says.

Mercer’s Wilson says that factoring companies, who lend money to businesses using their receivables as collateral, also are competitors in the B2B space. Bain’s Harris predicts that B2B payment companies and factoring firms inevitably will become the same.

"Just like what banks have done for years,” Harris says. “People who control the payments flow will be the ones in the best position to do lending."

Yizhu Wang is a financial technology reporter based in New York. Karen Padley covers financial services from Mergermarket’s Chicago bureau.

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